Question

Warmack Machine Shop is considering a four-year project to Improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $235,000 In annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $94,000. The press also requires an Initial Investment in spare parts Inventory of $29.000, along with an additional $3,400 in Inventory for each succeeding year of the project. The shop's tax rate is 35 percent and its discount rate is 9 percent. (MACRS schedule) Calculate the NPV of this project. (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $D Should the company buy and Install the machine press? Yes NO

Answer 1

	0	1	2	3	4
Pretax savings in cost		$ 2,35,000.00	$    2,35,000.00	$   2,35,000.00	$ 2,35,000.00	Total Depn	Book Value
-Depreciation expense		$ 1,12,000.00	$    1,79,200.00	$   1,07,520.00	$     64,512.00	$ 4,63,232.00	$     96,768.00
=Incremental NOI		$ 1,23,000.00	$       55,800.00	$   1,27,480.00	$ 1,70,488.00
-Tax at 35%		$      43,050.00	$       19,530.00	$       44,618.00	$     59,670.80
=Incremental NOPAT		$      79,950.00	$       36,270.00	$       82,862.00	$ 1,10,817.20
+ Depreciation		$ 1,12,000.00	$    1,79,200.00	$   1,07,520.00	$     64,512.00
=Incremental OCF		$ 1,91,950.00	$    2,15,470.00	$   1,90,382.00	$ 1,75,329.20
-Capital expenditure	$   5,60,000.00
-Investment in NWC	$       29,000.00	$        3,400.00	$          3,400.00	$         3,400.00	$       3,400.00
+After tax salvage value = 94000+(96768-94000)*35% =					$     94,968.80
+Recapture of NWC					$     42,600.00
Incremental project cash flows	$ -5,89,000.00	$ 1,88,550.00	$    2,12,070.00	$   1,86,982.00	$ 3,09,498.00
PVIF at 9% [PVIF = 1/1.09^t]	1	0.91743	0.84168	0.77218	0.70843
PV at 9%	$ -5,89,000.00	$ 1,72,981.65	$    1,78,495.08	$   1,44,384.41	$ 2,19,256.19
NPV	$   1,26,117.32
Should the company buy and install the
machine pres?
YES [as the NPV is positive]